Forbes

Outsourcing the Fight

In 1992 a relatively little-known, Texas-based oil services firm called Halliburton was awarded a $3.9 million Pentagon contract. Its task was to write a classified report on how private companies, like itself, could support the logistics of U.S. military deployments into countries with poor infrastructure. Conspiracy theories aside, it is hard to imagine that either the company or the client realized that 15 years later this contract (now called the Logistics Civilian Augmentation Program or LOGCAP) would be worth as much as $150 billion.

The use of private contractors in U.S wars dates back to the sutlers, merchants who followed behind Revolutionary and Civil War armies selling incidentals to the troops like jam or whiskey. But the size and scope of the private military industry today is unprecedented. In Iraq alone, there are some 180,000 private military contractors performing functions that once would have been handled by soldiers in uniform.

The vast bulk of these contractors handle military support functions: building and operating military bases, maintaining and repairing military equipment and vehicles, and moving massive convoys of supplies that are both vital to the operation's survival (like gas and ammunition) and not so vital (like Pizza Hut Personal Pan Pizza). Getting those jobs done has incurred a great cost, both financial and human; according to Department of Labor insurance claims, 1,292 contractors have been killed and 9,610 wounded as of April 2008.

Contracting out logistics has brought the skills and resources of hundreds of companies from around the world to support the war effort. But, much like when a business outsources too much of its supply chain, this process has caused a loss of control. While companies only perform the jobs specified in their contract, war is an environment in which flexibility is needed most.

Take for example the recent news that at least 12 U.S. soldiers have been accidentally electrocuted inside their bases in Iraq. Staff Sgt. Ryan Maseth, a highly decorated Green Beret, was killed while taking a shower 11 months after KBR (nyse: KBR) contractors had first found potentially serious electrical problems in the facility's construction. But KBR's contract didn't cover "fixing potential hazards." It only required them to repair items that were already broken.

Handing over control to contractors has also led to allegations of war-profiteering . Almost all of today's logistics firms are operating under "cost-plus" contracts--a structure that is ripe for abuse. Examples in Iraq range from billing for soldiers' meals that were never cooked or served to convoys shipping "sailboat fuel" (as Halliburton-KBR truck drivers laughingly termed charging the government for moving empty pallets from site to site). According to testimony before the House Committee on Oversight and Government and Reform, the Defense Contract Audit Agency has identified more than $10 billion in unsupported or questionable costs from battlefield contractors--and it has barely scratched the surface.

Such losses don't just represent misspent funds; they represent lost opportunities to actually support our diplomatic and military goals. The situation has gotten so bad that the special inspector general for Iraq reconstruction dubbed corruption as the "second insurgency" in Iraq.

Many worry that the lack of control due to outsourcing could weigh even heavier and even put an entire military operation at risk. Consider what happened during the 2004 Sadr uprising, where a spike in attacks on convoys caused many companies to either withdraw or suspend operations, causing fuel and ammunition stocks to dwindle.

It is important to remember that private contractors are not bound by the same codes, structures and obligations as those in public service. As Tom Crum, then the chief operating officer for KBR's logistics operations, wrote in an internal memo, "We cannot allow the Army to push us to put our people in harm's way. ... If we in management believe the Army is asking us to put our KBR employees in danger that we are not willing to accept, then we will refuse to go."

As civilians, this choice is their right to make. But as retired Army Major Gen. Barry McCaffery testified to Congress in 2007, the consequence of turning over so much of the supply system to private civilian firms, which have this right to decide when and where they deploy, makes our logistics system "a house of cards."

In the same way that companies such as Cisco were forced to reconsider their outsourcing policies in the late 1990s, after they lost the ability to deliver on core functions, the military (with a push from Congress) needs to reevaluate what is appropriate to outsource and what is not. If a task is critical to the mission's ultimate success or failure, then perhaps it should be kept in-house. In other words: Feel free to outsource the Burger Kings, laundries and base construction, but maybe we ought to keep roles like military interrogators, armed troops and movement of critical supplies (all now outsourced) inside the system.

The Pentagon also has to do a much better job of being a smart client. Far too few contracts get any true competition to drive down prices. Instead, they tend to be bundled together into massive structures, where a few prime contractors (just three in the new version of LOGCAP) are the ones that dole out sub-contracts. Add in the largely cost-plus contract structure, and savings tend not to accrue.

There also aren't enough eyes and ears working on behalf of the government client to monitor contractor performance. In 1998, there was one financial auditor for every $642 million in Pentagon contracts. Today, there is one auditor for every $2.03 billion in contracts.

These auditors aren't just required to catch false billings and cost overruns, but also to ensure quality. That soldier's electrocution didn't happen because of malice; it happened, as an internal Pentagon e-mail revealed, because KBR's inspections were never reviewed by a "qualified government employee," and the Army wasn't aware of "the extent of the severity of the electrical problems."

Finally, the Pentagon needs to use its massive buying power to shape and sanction the market, much like Wal-Mart does to wring out efficiencies and send warnings to any vendors that think to cross it. For example, the new LOGCAP contract, potentially worth up to $150 billion, went to KBR, DynCorp and Fluor. Yet, as the Project on Government Oversight found, these same three companies have been cited for 29 cases of serious misconduct in the last decade--a category of allegations that includes false claims against the government, violations of the Anti-Kickback Act, fraud and conspiracy to launder money.

There's no doubt that demand for outsourced logistics has grown, and that private military contractors are bigger than ever. But we've yet to see whether the government will advance equally in its efforts to become a smart regulator and customer of this marketplace.